Joneja Bright Steels The Cash Discount Decision Case Study Solution
Quantitative Analysis
Quantitative analysis has been performed to analyze the company’s current financials and its future possible expected outcomes. Currently,there is a declining trend in steel prices because of the decreased steel demand prevailing in the industry. Thus, company is experiencing significant decline in its revenue.
Liquidity Analysis
Liquidity analysis provides with an insight to investigate the company’s matter efficiently. It tells the company’s current situation and how the company’s operations are being processed. Hence, a liquidity analysis has been performed to identify the company’s current situation.
Working Capital of JBS
Working capital identifies, how the company’s day to day operations run on the basis of its current assets and current liabilities. The formula to calculate working capital is less current liabilities from current assets of the business. JBS working capital is ₹253.94, which shows that the company has ₹253.94 to run its day to day operations smoothly.
Current ratio and quick ratio also help in identifying the company’s current position by expressing how effectively company is using its current assets to pay out its current liabilities. The current ratio is 2.10, which represents that JBS has ₹2.10 in current asset to pay its₹1 current liability. (See appendix B for JBS working capital).Hence, the ratio represents a clear picture and could be considered as beneficial financial condition.(M Anand, CP Gupta, 2002)
Working Capital of JBS Competitors
Another quantitative technique is being used or identifying the comparison of JBS with the relevant competitive companies. A comparison based on the company’s working capital has been performed to analyze where JBS standsin the steel industry. The analysis representsdifferent working capitals for different companies depending on size and revenues of the relevant companies. (See appendix C for JBS competitor’s working capital)
Omega bright steel shows higher working capital of ₹674.70 ascompared to other companies, but it is because of the large size of OBS. Other competitors represent ₹12 and ₹12.9 working capital as compared to JBS. Omega bright steel and JBS show higher working capital as compared to other competitors. But working capital could not provide us with the wide-ranging comparable analysis between the companies in order to identify the competitive edge between companies. For this, the effective comparable financial metrices arecurrent ratio and cash conversion cycle. The current ratio of omega steel, Gopalson steel and C. Lal Alloys Pvt. Ltd are 4.27, 1.05 and 1.08 respectively. This shows the company’s ability to pay its debt out of its current assets. In comparison, Omega steel represent edge over all the other competitive firms.
Profitability analysis
Ajai has been considering the potential possibilities to cope up with the current challenging situations. He formulated some strategic moves to increase JBS revenues with the consideration of decreased potential steel demand because of the global Automobile industry. Adetailed profitability analysis has been performed with two considerations for the year 2016/17.First consideration is that the company will follow its existing conservative credit policy and will not offer any discount to its customers. Other aspect is that the company will introduce new credit policy that will allow customers to avail 2% discount on their purchases if it makesthe payment within 10 days.(Mulhern, 1999)
The analysis present two different results. If the company will follow its existing conservative credit policy. The company will earn huge losses because of interest it is paying for their working capital loan and also for the decreased demand. The projected income statement has been made with the help of horizontal analysis, because this analysis presents the true outcomes as compared to vertical analysis. (See appendixD for JBS profitability capital).
Another aspect is that the consideration of new credit model presents expected positive outcomes. The projected income statement has been made with the help of given data in the case. The case suggests 8% growth rate for JB Srevenue, and also allow an opportunity cost of investing fund as saved amount which will be utilized further to meet the company’s working capital requirements, while other aspects remain same. So, the analysis provides us with the positive outcomes for the future perspective.
Alternative solutions
After analyzing all the situations with the help of stated facts and figures, following alternatives solution are suggested for JBS to cope up with this grim situation:
Alternative #1 (Credit Discount Model)
The First alternative solution suggests that JBS should introduce new credit model offering flexible credit terms, which will help the company in increasing its revenue with the 8% growth rate. The new credit model suggests 2% discount on the purchases, which must be paid within 10 days period. This will help the company to increase its revenue, and provides with the opportunity cost for fund investment. Furthermore, the returns on investment will help the company to operate its day to day operations smoothly, and on the other hand save interest expense on working capital loan.
Alternative #2 (Mass Marketing to Attract Potential Customers)
The second alternative solution suggests that the company should formulate a mass marketing strategy to grasp the great market share in a short period of time.It should target the whole Indian market segment rather than only northern India.
It is further suggested to target Indian industry of Automobile manufacturers because it has a good growth rate.The Indian government is encouraging the automobile manufacturing industry, for which it has made a plan to make India the automobile designing and manufacturing hub. The industry has great potential to provide excessive revenues.
Alternative #3 (Capacity Utilization)
The third alternative solution is that the company should utilize its full capacity of production, producing more and grasping more market share by utilizing the unused capacity of production unit. JBS has four manufacturing steel plants with huge production capacities, but the company is not utilizing its 20% capacity because of the decreased demand and is focusing on some major big companies. JBS should utilize its unused capacity to earn more revenues by attracting potential customers.
Recommendations
After having a thorough analysis of the current situation of JBS;it is recommended to take in consideration the credit discount facility which allow 2 percent discount on the payment of account receivable in 10 days, and make the credit terms more flexible because it will help in handling the cash issue,and will prevent the company from paying the interest against short term loans so ultimately increase company’s profitability.
It is further recommended to run its working capital operations smoothly, JBS should formulate strategic moves to introduce its new credit discount model through aggressive marketing. Company should increase its potential customers by offering flexible discount offers and customized product,which will ultimately help the company to increase its market share.
Conclusion
JBS is a well-established company of bright steel products, but the company is facing some liquidity problem along with the decline in its sales. The Managing Director has proposed a flexible credit discount policy, because he is unable change the price of their products due to weak demand and the slow-down in the economy. The thorough situational analysis suggests that the liquidity of the company can be enhanced and improved by adopting credit discount policy. The analysis also supports the factor that the through mass marketing JBS can increase its revenue generation and profitability………..
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